2010 November 24 Wednesday
But Who Caused Irish Financial Crisis?

Punish the Irish for their profligate ways? Stick them with IMF supervision and harsh austerity measures? That appears to be the way things are heading. But how about a reality check? Ireland's banks are going to get bailed out by Irish taxpayers for years to come (and many Euro country banks will benefit).

Ireland is still negotiating the terms of the bailout with European Central Bank and IMF experts. It hopes the tough budgetary medicine will permit its 2014 deficit to fall to 3 percent of gross domestic product, the limit for the 16 nations that use the euro currency.

While most eurozone members are violating that rule, Ireland's deficit this year is forecast to reach 32 percent, a modern European record, fueled by exceptional costs from Ireland's unfathomable bank-bailout effort.

Here's what I want to know: Why didn't the Irish government let its banks fail and for the non-depositor creditors of those banks (mostly other European banks) take a bath on their credits? Ireland's property bubble was fueled by loans flowing into it from reckless banks of other countries. Why weren't these banks made to pay for their foolishness?

The view that Ireland was a spendthrift country just like Greece knocks up against the fact that in Greece it was the government borrowing and spending like mad. Whereas in Ireland it was the banks which lent like mad. So posturing by, say, Germany demanding greater fiscal responsibility from Ireland really misleads on the causes of the crisis. Why wasn't the German government (and other Euro governments) preventing their banks from lending so recklessly to Irish banks? Lenders should be responsible for their recklessness. Making the Irish people pay the vast bulk of the bill for mistakes of both Irish and non-Irish banks seems morally wrong. Lending is a risk. That's why the interest rate on commercial loans is higher than the cost of money for very low risk borrowers such as the German government.

The money lent to Ireland by the European Central Bank has really gone to German, French, and British banks.

There has been a quiet exodus of billions from Ireland in recent weeks. Most international investors were no longer willing to lend Irish banks as much as a cent. The Irish banks repaid €55 billion ($75 billion) to their international creditors, mainly German, French and British banks, because the corresponding bonds had matured. But those creditors took the money and fled from the country. Only government-owned banks were still willing to lend money.

Estimates of lending from non-Irish banks to Irish banks cover a wide range. Here's an estimate of $170 billion. But keep in mind that some non-Irish banks have already managed to get paid back with the debts shifting onto the ECB and Irish taxpayers. Is that fair? No.

Even without the CDS loss multiplier, the impact of debt haircuts would be painful for British and international banks. According to the Bank for International Settlements, total lending of non-Irish banks to Irish banks is around $170bn, of which British banks provided $42bn, German banks provided $46bn, US banks $25bn and French banks $21bn.

The Euro debt crisis is all about wealthier nations lending to the housing bubble nations and spendthrift governments.

French banks had lent $493 billion to Spain, Greece, Portugal and Ireland by the end of 2009 while German banks had lent $465 billion, according to the report by the Bank for International Settlements, an institution based in Basel, Switzerland, that acts as a clearing house for the world’s central bank.


All told, Spain, Ireland, Portugal and Greece owe nearly $1.6 trillion to banks in the 16-country euro zone, either in the form of government debt or credit to companies and individuals in the four countries, the report said. Credit from French and German banks accounted for 61 percent of that total.

The German banks put themselves at considerable risk by lending so much to the Irish. The German banks were enablers of the Irish property bubble.

SPIEGEL ONLINE: According to Germany's central bank, the Bundesbank, German banks are Ireland's biggest creditors, to the tune of €166 billion ($226 billion), and that includes hundreds of short-term loans to Irish banks. How dangerous is the Irish crisis for Germany?

Bofinger: The situation is very dangerous. The German government has a vital interest in ensuring the solvency of the Irish state and its banks.

Update: Simon Johnson says Ireland's debt is even bigger than it looks.

To be clear, Ireland owes a huge amount of money to the outside world. In the best scenario, Ireland’s government debt is likely to stabilize at more than 100 percent of gross national product, or G.N.P.; in the worst scenario, with greater real estate losses and a deeper recession, this level could reach 150 percent.

That’s a higher number than you see in many news reports, in part because officials are still focused on gross domestic product, a misleading statistic in the Irish case, as Peter Boone and I have been arguing in this space for some time.

Come Peak Oil several Euro states will default on their debt and the Euro zone will break up. Will a smaller Euro zone survive?

Share |      By Randall Parker at 2010 November 24 10:55 PM  Economics Sovereign Crises

Tom said at November 25, 2010 4:57 AM:

Why were they bailed out? So we can continue the creation of a new class of political and financial elite (nobles) to rule over us (new peasants). That's the endgame.

Lyn Braithwhaite said at December 1, 2010 12:02 AM:

You imply that lenders are the primary culprits, borrowers merely the passive victims? Come on now....

It was Hitlers primary intent to have Germany surrounded by subservient weak states, which would allow German prosperity to thrive. How well he has succeeded...

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